Small-cap equities and the related exchange traded funds, such as the iShares Russell 2000 ETF (NYSEArca: IWM), have struggled to start the new year. Some technical analysts believe small-cap ETFs and stocks need to get their respect acts together soon or risk a lengthy period of disappointing performances.
Smaller companies are a play on the domestic economy. While previous economic reports have been less than appealing, economists expect the gross domestic product to accelerate in the second half of the year. [Mid-, Small-Cap ETFs to Focus on U.S. Growth]
If the U.S. economy continues to expand, smaller companies may continue to outperform. In contrast, large-cap benchmarks, like the S&P 500, include more slow-growing multinationals, which may have seen weakened overseas revenue streams after the U.S. dollar strengthened. Additionally, small-caps have historically been strong performers in December and January, but that has not been the case this year. Nor was it the case to end 2015.
“The Russell 2000 index is very oversold on a daily momentum basis and there is the potential for a bullish momentum divergence on the weekly chart so the next week or two should be very interesting,” according to See It Market.
Observers argue that due to their domestic focus, small-caps could be better insulated from macroeconomic forces ahead, such as a strengthening U.S. dollar and slowing Chinese growth, that could affect their larger peers, writes Dan Strumpf for the Wall Street Journal.
However, growth has been uneven in the U.S. this year, with the economy expanding 2% in the third quarter, down from 3.9% in the second quarter and up from 0.6% in the first three months.
“The worry of the week is, of course, China with a little North Korea thrown in there. These China worries have been ongoing since the last meltdown in August and are certainly one of the main reasons (according to many) why the major indices have been limping along. However, there must be more to it than just China. I’m not here to speculate as to why the market does this or that, just tell you up or down and how big,” adds See It Market.
iShares Russell 2000 ETF
Tom Lydon’s clients own share of IWM.